Suppose you own two assets with the following payouts. (1) $200 at the end of every year...

Question:

Suppose you own two assets with the following payouts.

(1) $200 at the end of every year starting 1 year from now. The annual cost of capital for these cash flows is 15%.

(2) $800 one year from now and a cash flow that is 4% larger than the prior cash flow every year thereafter. The annual cost of capital for these cash flows is 9%.

What is the weighted average cost of capital of these two asset portfolio?

Annuity:

An annuity can help an investor to secure future financial health due to its regular cash inflows within a particular term. Investors should estimate the value of annuity and compare the estimated value with the market price to determine whether the annuity is overvalued or undervalued.

Answer and Explanation: 1

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Estimate the value of the first asset:

{eq}PV_1 = \displaystyle \frac{PMT_1}{I_1} = \frac{\$200}{15\%} = $1,333.33 {/eq}

Estimate the value of the...

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What is Annuity? - Definition & Formula

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Chapter 2 / Lesson 7
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An annuity is a fixed amount of income paid at regular intervals, such as monthly or quarterly. Learn the definition and formula for annuity, review examples of annuities, and understand how to determine the value of annuities.


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